The measures announced in the Federal Budget represent a significant overhaul of Australia’s Capital Gains Tax rules, moving away from the familiar 50% CGT discount towards a cost base indexation model. For technology founders, early-stage investors and employees holding equity, this change strikes at the heart of how a successful exit is taxed.
Accordingly, to preserve the incentive for innovation and entrepreneurial risk-taking, Treasury sought public consultation on the proposed Innovative Business CGT Concession (IBCC) – the mechanism intended to keep the after-tax reward for building a high-growth Australian tech company attractive.
Here is a practical overview of the proposed IBCC, and what, if anything, founders need to do now.
Why the IBCC matters
Founders and employee share scheme participants almost always realise their gains from a low or nil cost base. You start with shares worth next to nothing and, if things go well, sell them a few years later for a substantial sum. Under a straight indexation model, with no discount, that entire gain is taxable at the individual’s marginal tax rates. Many early-stage investors would face the same issue.
The IBCC is designed to acknowledge that the people taking the earliest and largest risks in the innovation ecosystem shouldn’t be disproportionately penalised by broader reforms aimed at the wider economy.
How the concession is proposed to work
The design is still in consultation, but the key features are:
- Eligibility thresholds – the concession is aimed at companies less than ten years old with turnover under $50 million, targeting genuinely early-stage, higher-risk businesses.
- Extended eligibility – a 15-year window is proposed for sectors with long development and commercialisation cycles, such as biotech, medtech and deep tech. In our submission paper to Treasury, we argued this should extend on principles-based grounds to climate tech, defence tech and advanced manufacturing as well.
- An innovation test – modelled on the existing Early Stage Innovation Company (ESIC) regime, testing concepts like scalability, competitive advantage and high-growth potential.
- A five-year minimum holding period to encourage patient capital.
- A $10 million lifetime cap per participant on the concession.
- Newly issued shares only, with an 80% active asset test applying at the company level.
If you already work within the ESIC and ESS Startup Concession frameworks, much of this will feel familiar. This is deliberate and something we encouraged Treasury to lean into further to reduce compliance duplication.
The complexities
The concept of the IBCC is welcome, but the current design has some gaps that need addressing, such as:
- Certainty at exit: The innovation test is based on the ESIC principles test which is inherently subjective. The problem is that its value may not crystallise until years later and nobody wants to discover at the time of an exit that the company failed a qualitative test set half a decade earlier. A points-based pathway and upfront certification would fix much of this.
- Holding company structures: As drafted, the shares must be issued by the company actually carrying on the innovative activities. This risks excluding the very common holding company and trading subsidiary structure many founders adopt for IP protection and risk separation once the business is proven.
- The five-year holding period: Requiring shares to be held for at least five years could exclude later-joining employees and follow-on investors from the concession, even where they take on real risk and contribute significant value. It may also disadvantage SAFE note holders, as SAFEs generally do not convert into shares until a later stage.
- The $10 million cap: A rigid lifetime cap may disincentivise serial founders and repeat angel investors from recycling capital back into the ecosystem.
- Secondary sales: Many tech firms frequently use secondary share sales to provide liquidity to staff. The current draft fails to accommodate these types of secondary transactions.
What you should do now
Firstly, recognise this is a proposal, not law. The IBCC is at consultation stage, so don’t restructure your affairs in response to a proposed concession that could materially change before it’s legislated.
Secondly, factor it into the decisions you’re already making. If you’re contemplating a corporate restructure such as a flip-up, or an ESOP, understand that structure could affect future eligibility. Building it into the conversation now is far cheaper than unwinding it later.
Keep your house in order. Maintain the kind of records that support the proposed innovation test requirement. ATO guidance states that businesses relying on the ESIC principles test should have documentation demonstrating how they satisfy each of the five principles, such as a business plan, commercialisation strategy and competitor analysis.
The design of the ESOP and cap table will be more important than ever. The proposed holding period and ‘newly issued shares’ rules mean the when and how of issuing equity to staff and investors matters. Keep it in mind as you plan to raise capital or issue new tranches of options.
The IBCC is a positive step and one worth understanding well before your next raise or exit. If you’d like to talk through how the proposed rules could affect your structure, your team’s equity or your investors, contact your local William Buck advisor.
